When Momentum Stops

“Bandwagon” describes a condition where many people share a common view.  The view tends to escalate as more people join the movement.  In the stock market, it creates a “momentum trade” situation.  The problem with bandwagons and other moving things, is that you must know when to get off.

On a subway or bus I know to get off when I reach my destination.  Bandwagons seem to have no such limit.  They roll on with no predetermined stops.  That does not imply there are no stops.  Eventually the bandwagons break or just get tired and stop.

You can estimate the status of a bandwagon if you pay attention.  That will afford you the opportunity to get off before the stop.  There are a few indicators.

  1. Is the bandwagon accelerating, moving steadily, or decelerating?  Accelerating momentum trades make sense, but not forever.  Eventually the wheels fall off.  All momentum trades are two decision situations. When to get in and when to get out.
  2. You can tell when the momentum is beginning to fall.  To accelerate, you need more believers.  To get more believers you need a better story.  To get a better story you must create some exciting new “facts.”  To protect the story you must attack those who disagree.  If the attack does not objectively explain the error of their beliefs, especially if they attack the objectors, then the story has reached its zenith and it is time to move out.
  3. Prophesy in the stock market is a failed profession.  Watch for predictions that are rooted in exciting facts.  Brexit is a clear current example.  No one knows what will happen yet.  The facts around Brexit involve many more matters than economics and finance.  The few people I have talked to would support Brett, because of politics, even at costs greater than people are currently prophesying.
  4. Bandwagons are not moving for reasons that will prevail forever.

Most of the “leave” thought seems to be around autonomy and self-determination.  Both denied under the EU bureaucracy.  It is still early innings on the effects on Britain and the EU, but there are some who believe that the EU could not last in any case.  Its political goals and bureaucratic goal of standards and uniformity is not achievable.  Homogenized milk is a good idea.  Homogenized people, not so much.

The EU negative fallout bandwagon will turn at some point, but not until the “feelings” of doom are removed from the marketplace.  Fear is a poor counselor.  Timing the market in complex situations is impossible, but it is possible to profit none the less.  The key variable is to get in a bit later than some of the others.  Let them turn the bandwagon around.

The mission is to be among the first to be right.  Merely being first is often costly. Patience is the hallmark of an investor.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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